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In Plain Sight
Perspective on the News
Monday, December 12, 2011
Ed DeShields

The new political season has found our country at a crossroads.   Americans are running out of patience with the indecision, claims and counter-claims of a do-nothing government at the precise moment when sure-footed action is necessary to avoid or minimize the very painful outcome ahead for our nation.

Given the economic mess we’ve found ourselves in, whose ideas should we trust with our vote?  Which economic policies are in the best interest of the country?   Who is telling the truth?

Let’s take a look.

There’s a formula every American should learn to help decide who’s got the better argument to avert the certain fiscal collision we’re facing.  Stay with me; it’s actually pretty simple to understand.

GDP = government investment + private investment + net exports

This simple mathematical formula is a rule that is directly affected by the policies from those who govern.

The economy (Gross Domestic Product) is made up from contributions made to it by Government and Private investment.  And, when we import or export goods (Net Exports) we add those amounts too.

If Government Investment goes up, Private Investment must go down.  If we import more goods than we export, GDP goes down.  Because there is only so much money in the system, when one category rises, the other must fall.  All values can’t go up at the same time.  Competition for resources governs any free market.

Now, let’s translate your favorite candidate’s economic ideas with this formula in mind.

It’s fair to say that the Obama administration and the Democrats favor the government’s prominent role in the economy.  That means Private Investment goes down.   Likewise, the Republicans are generally for reducing the size of government and giving Private Investment the reins to the rebuild the growth in GDP.   However, this requires lower Government Investment and some politicians resist that idea as contrary to what they think the people want, or need.

So let’s study some common proposals and its effect on our Formula.

What about taxes?  If you raise taxes it comes at the expense of the Private Investment.  So Government Investment goes up.

If you cut taxes, Government Investment must shrink.  If government shrinks it becomes more efficient in performing its basic responsibilities.  There’s less chance for programs that aren’t needed, or wanted by its citizens.  Cutting taxes leaves more money in the hands of Private Investment and there’s a pretty good chance that money will produce an economic return (like jobs).

If government policy increase taxes selectively (e.g. on rich people only) then the same Formula applies.  The Government tricks the system to get more money thinking rich people won’t need or use the extra money for Private Investments.  Fat chance.  And, intellectually dishonest if you ask me.

Now, let’s study the subject of jobs.   A government job produces nothing.  It robs resources from the Private Investment side of the formula.

Here’s an interesting fact.  It is Private Investment alone that creates jobs. All of the last 3,000,000 jobs created came from small (Mom & Pop) companies.  Large companies actually destroy more jobs than they create.  This is because as companies grow they get more productive and need fewer employees.  But their profits wind up in the financial markets.  That money, until 2008, was loaned to Private Investment to build homes, factories, and cars (via the private bond markets).

When the financial markets crashed in 2008, Private Investment that had historically created loan capital disappeared and the Government took over.  In fact 96% of all mortgage loans are now originated or owned by the Government.  The Government does a lousy job at managing investment through is primary caretakers Fannie Mae and Freddie Mac – but wrongly blame the Private Investment sector for its misdeeds.

Where does your favorite politican stand?  If he is saying we must create policies that promote growth from small employers his/her policies are more likely to be successful.  Or, if your candidate says we need more government regulation, or higher taxes, Government Investment will compete for those resources at the direct expense of Private Investment needed by the GDP for growth.

Every action has an equal and opposite reaction so-to-speak.

About Ed DeShields

Last article: EU's Great Leap into the Non-Negotiable Unknown?



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